World Acceptance Corporation

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World Acceptance Corporation

108 Frederick Street
Greenville, South Carolina 29607
U.S.A.
Telephone: (864) 298-9800
Fax: (864) 298-9810

Public Company
Founded: 1962 as World Finance
Employees: 1,640
Sales: $155.7 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: WRLD
NAIC: 522291 Consumer Lending

A provider of consumer loans, World Acceptance Corporation focuses mainly on the subprime market, comprised of individuals with limited access to credit due to low income or previous credit problems. The company offers high interest loans of less than $1,000 and maturity at less than one year. This market provides a high return on investment as the company charges the highest fees and interest rates allowable by state laws. World offers larger, lower interest loans, up to $3,000, with maturity ranging from 18 to 24 months. Related services include credit insurance in certain states and credit for the purchase of electronic goods and appliances through the World Class Buying Club. World acts as agent to sell automobile club memberships and provides tax preparation and electronic filing services as well. World operates more than 470 offices in South Carolina, Texas, Georgia, Tennessee, Oklahoma, Kentucky, Illinois, Missouri, New Mexico, Louisiana, and Alabama.

Growing Slowly But Profitably in the 1960s

World Acceptance Corporation began operations in 1962 under the name World Finance, providing small-loan consumer credit through four offices in Greenville, South Carolina. The company catered to people who had no other form of credit available due to low income or prior credit problems, but who needed cash for an unexpected expense, such as a car repair. While small-loan finance involved high-risk lending, the risk was spread over many loans and World charged the highest fees and interest rates allowable by law; fees and interest added as much as 90 percent of the loan amount to repayment. World was managed profitably and expanded slowly and by 1973 the company operated 54 offices in South Carolina, Georgia, and Texas.

In 1973 Southern Bank, also of Greenville, acquired World. Ownership by Southern Bank enhanced World’s ability to operate profitably by expanding the supply of money for loans at lower interest rates. In 1979, when interest rates reached a historical peak, Southern Bank obtained money for lending at 9.95 percent interest, lower than national rates. While return on investment was lower overall, compared with 1978 banker interest rates of approximately 7 percent, the lower rate obtained by Southern minimized the “squeeze” on investment.

In 1979 World sought to reduce costs and began a three-year process of installing an online computer system at branch offices. The system sped the pace of handling accounting functions, such as recording loans administered and loan payments. By improving operational efficiency, World freed loan officers to provide better customer service and to perform more thorough credit evaluations. As World expanded, computerized office functions played a significant role in increasing the number of loans issued at a comparatively small increase in expense.

Southern Bank continued World’s expansion, opening or acquiring new loan offices. In 1980 the State of Oklahoma granted World a charter to operate and over the next two years World opened six offices in Oklahoma. In 1982 World operated 87 offices, 39 in South Carolina, 25 in Texas, 17 in Georgia, and six in Oklahoma. Loans receivable reached $26.6 million, garnering $3.3 million in earnings before taxes.

World accelerated the pace of growth, opening or acquiring 17 offices in 1983 and 14 offices in 1984. In 1985 the company opened its first office in Louisiana. When First Union Corporation of Charlotte, North Carolina, merged with Southern Bank in 1986, the company operated 143 offices in five states. First Union showed little interest in developing World’s network of offices, however, and expansion at World stalled.

1989 Management Buyout Serving to Renew and Accelerate Expansion

Charles Walters, president of World and an employee since 1972, led a senior management buyout of the company from First Union. In April 1989 World became an independent company with Walters as chairman, president, and CEO. World became a public company in December 1991, raising a net of $13 million with common stock selling at $7 per share. In order to improve the company’s financial situation and credit terms, World used the proceeds to redeem outstanding preferred stock and to pay junior subordinated notes.

After a hiatus of new openings between October 1987 and July 1989, World opened or acquired 30 offices between July 1989 and December 1991, ending fiscal 1992 with 176 offices. World recorded $44.6 million in loans receivable, an increase from $38.4 million in 1989 when the management buyout process began. Revenues from fees and interest increased from $32.3 million in 1989 to $39.9 million in 1992, garnering net income of just less than $2 million. Texas and South Carolina offices comprised the majority of revenues, at 39 percent and 38 percent, respectively. Georgia offices comprised 13 percent of revenues; Oklahoma, 8 percent; and Louisiana, 2 percent. The average loan issued was $368, with an average maturity of eight months.

The increasing number of offices in Texas resulted in a higher rate of charge-offs, as the state banned the sale of credit-related insurance. This not only eliminated a base of revenue, it impacted potential credit loss as well. Net charge-off as a percentage of average loan receivables increased to 8.4 percent in 1992, from 7.9 percent in 1991. The company continued to focus its expansion efforts in Texas, Louisiana, and Oklahoma (which also banned the sale of credit-related insurance), because laws in those states permitted creditors to charge higher interest and fees than in South Carolina and Georgia.

As World expanded, its strategy involved placing loan offices near other lenders, due to the tendency of customers of small-loan consumer finance to use more than one lender. Most of the company’s competition came from independent offices or chains of 20 or fewer offices. The company saw its competitive advantage in terms of the volume of capital available at lower cost as well as operational cost efficiency from computerized accounting functions.

In April 1993 World purchased ParaData Financial Systems, Inc., creator of a proprietary software for administering consumer loans. After examining several software options, World chose ParaData’s system as the best. The company chose to acquire ParaData in order to have an in-house system that paid for itself, saving on the costly expense of outsourcing computer systems maintenance. While World converted its computer system to the ParaData software, a process that took a year to complete, ParaData continued to offer the software to other consumer finance companies.

Mid-1990s: Offering New Services and Continuing to Expand

First Union Corporation sold its residual interest in World Acceptance through a secondary offering of stock in May, allowing World to engage in business activities prohibited until this time. In November the company began to sell automobile club memberships, acting as agent for a third party, earning $236,000 in commissions for the remainder of the fiscal year.

In February 1995 World introduced the “World Class Buying Club” through offices in Texas. The program offered electronic goods and appliances through direct-mail catalogue and provided financing for purchases. Goods were shipped directly from the manufacturer. While World charged more than regular stores for the merchandise, they did not incur the expense of inventory, so the business proved very profitable. The program added $915,000 in new loans during the first four months. The World Class Buying Club was extended to Georgia and Tennessee in August 1995 and to South Carolina that fall.

The company’s office expansion strategy involved adding 20 offices per year, through acquisition or new stores opening. World finished fiscal 1993 with 191 offices, an addition of 15 offices. This included 11 offices in Texas, primarily in south Texas, and two offices in Nashville, a new market for the company. In Tennessee, World offered involuntary unemployment insurance as well. The company closed fiscal 1994 with 217 offices. In 1995 World added 27 loan offices, only two of them acquisitions. At the close of 1996 the company operated 282 offices, including the addition of 17 new offices opened that year.

In 1996 ParaData completed its largest project to date, the conversion of Mercury Finance, one of the largest financiers for used automobiles in the United States, to ParaData’s proprietary software. The sale to such a large customer resulted in an increase of revenues at ParaData to $3.4 million that year. World did not expect ParaData to maintain that level of sales; however, ParaData’s software supported more than 800 consumer loan offices operated by 92 different customers.

During fiscal 1996 revenues reached $69.9 million, representing a 20 percent increase over 1995 revenues and a 15 percent annual compound growth rate since 1992. The average loan was $500 with average maturity of ten months. By maintaining tight control over costs and loan quality, World increased net income by 22.5 percent to $10.6 million.

Company Perspectives

Our Mission: To be of service to our customers. To provide our employees a good work place with fair compensations, good benefits and advancement opportunities. To be sound. To be profitable. To be large.

Although loan receivables increased 11.5 percent to $99.4 million in 1996, this amount was below expectations, especially given the previous year’s 23 percent increase. World attributed this slow growth to insufficient advertising during the busy Christmas shopping season. The company hired consultants to analyze the company’s customer base, providing demographic and geographic profiles of potential customers. The company then purchased prospect lists that better characterized its potential market. To reduce advertising expense and improve efficiency, World Acceptance centralized advertising operations by purchasing automated mailing equipment, work previously handied manually at each branch office. The advertising resulted in a substantial response during the Christmas 1996 season, but many borrowers were already overextended and World Acceptance could not approve many of the applications.

The Consequences of New Competition in the Mid-1990s

During the mid-1990s, World experienced greater competition in the small-loan consumer finance industry, as credit card companies and other lenders entered the subprime lending market. Lenders were attracted by the potentially high return on investment in a large, fragmented market, with an estimated 30 percent of Americans unable to qualify for credit cards. In order to obtain a high volume of business from the outset, these lenders issued loans based on weak underwriting standards. This new competition impacted World in several ways—for instance, attracting customers from World’s repeat business. The weak underwriting standards allowed borrowers to carry a higher debt load than would otherwise be possible and World’s customers had a more difficult time paying debt. World experienced a rise in delinquencies and charge-offs, a trend that affected the consumer finance industry as a whole.

With customers overextended by loans granted by competitors, World’s charge-off rate increased to 11.2 percent of loans outstanding during 1996 and 13.7 percent in fiscal 1997. This is in contrast to a historical norm of 9 percent of loans receivable and a charge-off rate of 7.5 percent in 1995. The charge-offs had a negative impact on profits. After World experienced a 33.9 percent compound growth in net income from 1993 to 1996, net income declined 23.4 percent during fiscal 1997, to $8.1 million garnered from $75.4 million in revenues.

In fiscal 1997 World added 54 offices through acquisitions and new locations. In December 1996 the company purchased Personal Credit Plan of San Antonio, adding $11.5 million in loans receivable to World’s portfolio. The largest acquisition to date, Personal Credit, operated 30 offices in Texas and six in New Mexico, another new market for the company. World entered the Illinois and Missouri markets as well.

Changes in the small-loan consumer finance industry prompted World to look for new business opportunities. Rather than compete for small-loan business on the basis of high-risk loan practices, the company maintained its underwriting standards and restricted guidelines for ongoing renewal business. World chose to enter the market for larger consumer loans instead and in August 1998 the company acquired two loan offices, in Georgia and Tennessee, which offered loans up to $3,000. Although the yields were lower due to lower interest rates on larger loans, the risks were lower as well.

The negative consequences of loose underwriting practices in the subprime market resulted in a devaluation of World’s stock value. The company’s stock price peaked at $16.25 per share during 1996 and dropped to $5.63 at the end of fiscal 1997. World’s history of profitability attracted investors interested in the long-term potential of the company, however. Mills Value Advisor of Richmond acquired a 17 percent interest and Wanger Asset Management of Chicago also made a significant investment. CEO Charles Walters maintained an approximately 10 percent stake.

By 1998 profitability improved as competition abated and loan losses declined. Charge-offs declined to 9.4 percent of loans receivable. In addition, amortization of intangible assets, applied as noncash charges to earnings since the management buyout in 1989, ended in May 1997. In 1998 World reported $8.1 million in net income from $80.6 million in total revenues.

Diversification Accompanying Expansion in the Early 2000s

World continued to expand operations during the early 2000s, adding new services and expanding its large-loan portfolio. In 1999 the company tested tax return preparation and electronic filing services in 40 offices. Pleased with the results, World expanded the service to nearly all offices in 2000, collecting $1 million in fees. The service complemented World’s loan business, as tax preparation occurred primarily from mid-January to late February, the slowest time of the year for issuing loans. By 2003, tax preparation revenues reached $4 million.

World expanded its network of loan offices by acquiring and opening new offices. In April 2000, World acquired four offices in Kentucky, entering a new market and adding $7.5 million in gross loans receivable. Acquisitions in 2002 included six offices in Alabama, another new market for World. During fiscal 2000 through fiscal 2002 the company acquired 77 loan offices, though several were merged into existing locations. The company opened 26 new offices over the three-year period, operating a total of 441 offices at the close of fiscal 2002.

Key Dates

1962:: World Finance is founded with four offices in Greenville, South Carolina.
1973:: Southern Bank acquires the company, now named World Acceptance Corporation.
1982:: World issues $26.6 million in loans through 87 offices in South Carolina, Georgia, Texas, and Oklahoma.
1986:: First Union Corporation merges with Southern Bank.
1989:: Senior management buys World from First Union.
1991:: Initial public offering prepares World for profitable expansion.
1993:: World acquires ParaData Financial for its proprietary finance software.
1998:: Increased competition in small-loan finance leads company to enter market for loans up to $3,000.
2001:: World’s “large loan” portfolio increases 110 percent.

During 2001, several acquisitions involved businesses that provided large loans of up to $3,000, and World’s large-loan portfolio increased by 110 percent. In addition to diversifying its portfolio, the low-interest, large loans provided many benefits. These included lower expense and loss ratios as well as a tendency for borrowers to purchase credit insurance with the larger loans. During 2002 and 2003 large loans continued to grow, increasing by 10 percent and 24.4 percent, respectively. Large loans accounted for 27 to 28 percent of loans outstanding, with small loans accounting for approximately 70 percent. World’s average loan increased accordingly, to $687, with a nine-month average maturity.

At the end of fiscal 2003, World operated 470 offices in 11 states. The company reported revenues of $155.7 million and net income of $22.9 million. While a slow national economy created a rise in delinquencies and loan charge-offs, World’s charge-off rate of 14.7 percent on $266.8 million in gross loans receivable was offset by lower interest rates available to banks. During 2004 and 2005, World planned to continue its pace of expansion with 25 acquisitions or new office locations per year.

Principal Subsidiaries

ParaData Financial Systems, Inc.; World Acceptance Corporation of Alabama; World Acceptance Corporation of Missouri; World Acceptance Corporation of Oklahoma; World Finance Corporation of Georgia; World Finance Corporation of Illinois; World Finance Corporation of Kentucky; World Finance Corporation of Louisiana; World Finance Corporation of New Mexico; World Finance Corporation of South Carolina, Inc.; World Finance Corporation of Tennessee; World Finance Corporation of Texas.

Principal Competitors

Associated First Capital Corporation; Cash America International, Inc.; Citigroup, Inc.; Household International, Inc.; The Commerce Group, Inc.; Regional Finance Corporation.